Budgetary Control: Budgets, Flexible Budgeting and Standard Cost Basics Questions

Question 1

Define a budget.

Accepted Answer

A budget is a quantified plan for a future period, prepared and approved in advance to achieve organisational objectives.

Question 2

What is budgetary control?

Accepted Answer

Budgetary control is the system of preparing budgets, comparing actual performance with budgets, analysing variances and taking corrective action.

Question 3

What is a flexible budget?

Accepted Answer

A flexible budget is a budget prepared for different levels of activity and adjusted according to actual activity.

Question 4

Define standard cost.

Accepted Answer

Standard cost is a predetermined expected cost for materials, labour or overhead set under efficient operating conditions.

Question 5

What is a variance?

Accepted Answer

Variance is the difference between standard/budgeted performance and actual performance.

Question 6

State one objective of budgetary control.

Accepted Answer

One objective of budgetary control is to control costs by setting targets and monitoring actual results.

Question 7

Explain the objectives/advantages of budgetary control (any three).

Accepted Answer

Budgetary control offers many advantages. Any three are:

1) Planning and coordination: Budgets force departments to plan ahead and coordinate with each other (sales, production, purchase, finance).
2) Cost control: Targets are set and actual costs are compared with budgets to identify deviations and reduce wastage.
3) Performance evaluation: Departments/managers can be evaluated against budgeted targets, supporting responsibility accounting.

It also acts as an early warning system and improves profitability through better resource use.

Question 8

State the essentials (pre-requisites) of effective budgetary control (any three).

Accepted Answer

Essentials of effective budgetary control (any three):

1) Clear organisation structure with defined responsibility centres and authority.
2) Support from top management and proper communication of budgets to all concerned.
3) Accurate accounting system to provide timely actual data for comparison and variance reporting.

Other essentials include budget manual, budget committee, realistic estimates and follow-up corrective action.

Question 9

Differentiate between fixed budget and flexible budget (any three points).

Accepted Answer

Fixed budget vs flexible budget:

| Basis | Fixed budget | Flexible budget |
|---|---|---|
| Activity level | One level only | Multiple levels |
| Adjustment | Not adjusted for actual output | Adjusted for actual output |
| Usefulness | Limited when activity changes | Useful when output varies |

Hence, flexible budget provides a fairer comparison of cost performance when volume changes.

Question 10

Explain flexible budgeting and state the basic steps in preparing a flexible budget.

Accepted Answer

Flexible budgeting prepares budgeted costs for different levels of activity by classifying costs into fixed, variable and semi-variable.

Basic steps:
1) Select activity levels (e.g., 60%, 80%, 100%).
2) Analyse cost behaviour and separate variable and fixed portions (and split semi-variable if needed).
3) Compute variable cost per unit (or per activity measure) and adjust costs for each activity level; add fixed costs which stay constant in total.

This makes budget comparison with actual more meaningful.

Question 11

What is standard costing? Explain its purpose briefly.

Accepted Answer

Standard costing is a technique where standard costs are set for materials, labour and overheads, and actual costs are compared with these standards to find variances.

Purpose:
1) Cost control through variance analysis (identify where and why performance differs).
2) Performance measurement and responsibility fixation.
3) Helps in budgeting, pricing and decision-making by providing expected cost benchmarks.

Thus, it supports both planning and control.

Question 12

Explain favourable and adverse variances with an example.

Accepted Answer

A variance is the difference between standard/budget and actual.

- Favourable (F): Actual cost is less than standard cost (good). Example: Standard material cost ₹50, actual ₹45 → variance ₹5 F.
- Adverse/Unfavourable (A/U): Actual cost is more than standard cost (bad). Example: Standard ₹50, actual ₹60 → variance ₹10 A.

Variance analysis helps management find causes and take corrective action.

Question 13

Explain budgetary control system and describe the budgetary control cycle (exam-style).

Accepted Answer

Budgetary control is a system of planning and control in which budgets are prepared for a future period, actual results are recorded, actual performance is compared with budgeted targets, deviations are analysed and corrective action is taken.

Budgetary control cycle (exam-style steps):
1) Setting objectives and policy: Management decides goals (sales growth, cost reduction, capacity use) and policies.
2) Budget preparation: Functional budgets are prepared (sales, production, materials, labour, overhead, cash) and consolidated into a master budget.
3) Communication and responsibility: Budgets are communicated to departments; responsibility centres are defined and accountability is fixed.
4) Recording actual performance: Accounting system collects actual cost and revenue data during the period.
5) Comparison and variance analysis: Actual results are compared with budgets; variances are computed and classified as favourable/adverse.
6) Investigation of causes: Reasons are identified (price change, wastage, inefficiency, poor planning, volume change).
7) Corrective action and feedback: Management takes corrective actions (purchase control, process improvement, training) and revises budgets if assumptions change.

Thus, budgetary control provides continuous planning and control and helps coordination, cost control and performance evaluation.

Question 14

Prepare a flexible budget for 8,000 and 10,000 units. Variable costs: DM ₹30/unit, DL ₹20/unit, VOH ₹10/unit. Fixed OH ₹1,00,000. Show total cost at each level.

Accepted Answer

Given:
Normal capacity = 10,000 units
Variable cost per unit: DM 30, DL 20, VOH 10
Fixed overhead = ₹1,00,000 (constant in total)

Step 1: Compute total variable cost per unit
Variable cost/unit = 30 + 20 + 10 = **₹60 per unit**

Step 2: Flexible budget at 8,000 units
Total variable cost = 8,000 × 60 = **₹4,80,000**
Add fixed OH = ₹1,00,000
Total cost = 4,80,000 + 1,00,000 = **₹5,80,000**

Step 3: Flexible budget at 10,000 units
Total variable cost = 10,000 × 60 = **₹6,00,000**
Add fixed OH = ₹1,00,000
Total cost = 6,00,000 + 1,00,000 = **₹7,00,000**

Flexible Budget Summary:

| Particulars | 8,000 units (₹) | 10,000 units (₹) |
|---|---:|---:|
| Direct materials (30/unit) | 2,40,000 | 3,00,000 |
| Direct labour (20/unit) | 1,60,000 | 2,00,000 |
| Variable OH (10/unit) | 80,000 | 1,00,000 |
| Fixed OH | 1,00,000 | 1,00,000 |
| **Total cost** | **5,80,000** | **7,00,000** |

Hence, flexible budget shows cost at different activity levels.

Question 15

Explain standard costing and variance analysis (basics). Why are standards and variances useful to management?

Accepted Answer

Standard costing is a technique in which standard (predetermined) costs are set for materials, labour and overheads under expected efficient conditions. Actual costs are then compared with these standards to compute variances.

Variance analysis is the process of calculating and analysing the differences between standard performance and actual performance. Variances may be favourable (actual cost < standard) or adverse (actual cost > standard).

Basics (what is done):
1) Set standards: standard quantity, standard price, standard time, standard overhead rates.
2) Record actuals: actual quantity, price, time, overheads.
3) Compute variances: cost variances and (at basic level) interpret favourable/adverse.
4) Investigate causes: price changes, wastage, inefficiency, poor planning, volume differences.
5) Take corrective action: improve purchasing, reduce wastage, train labour, revise standards if needed.

Why useful to management:
- Provides clear cost targets and benchmarks for performance.
- Acts as an early warning system to control costs.
- Helps responsibility accounting by fixing accountability to departments/managers.
- Improves planning, budgeting and decision-making by providing expected cost information.

Thus, standard costing and variance analysis convert raw cost data into actionable control information.

Budgetary Control: Budgets, Flexible Budgeting and Standard Cost Basics

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